3 Hidden Signs of Surging Credit Stress

I’m here with a major warning — a warning about hidden signs of surging credit stress. In fact, I haven’t seen these kinds of dangerous credit market moves since the weeks and months leading up to the great credit crisis.

The comments above and below are excerpts from an articlebyMike Larson (moneyandmarkets.com) which has been edited ([ ]) and abridged (…) to provide a faster and easier read.

The first chart shows the 3-month LIBOR. The abbreviation stands for the “London Interbank Offered Rate,” and it’s a key benchmark of the cost of short-term borrowing for banks and corporations.

You can see from the chart that LIBOR has been rising quite a bit lately. It’s now the highest since the tail end of the credit crisis in 2009. You would expect to see LIBOR rise when the Federal Reserve is hiking interest rates, or talking about doing so.

The second chart shows the “TED Spread,” or the difference between LIBOR and the yield on credit-risk-free three-month Treasury bills…

You wouldn’t expect LIBOR to rise faster than yields on 3-month T-bills unless increasing credit stresses were building behind the scenes. Sure enough, T-bill yields have only climbed around 30 basis points since the beginning of October 2015. LIBOR has risen roughly 50 points during that same time frame. In fact, [though,] the TED spread is now at its widest since 2011-2012. That was when the U.S. debt ceiling debacle and European debt crisis were roiling the credit markets. If it widens by just a few points more, it’ll be the greatest spread we’ve seen since the tail end of the great credit crisis.

The third chart shows the “LIBOR-OIS” spread, the difference between LIBOR and the overnight indexed swap rate. This one is a bit more complex but you can think of the OIS rate as a benchmark for tracking how much banks are charging on very short-term lending to each other.

…I charted the LIBOR-OIS spread over a longer-term time frame for a reason. Go back to the far left of the chart [above] and you’ll see an initial jump higher in this spread in mid-2007. Then you’ll see it climbed steadily until the fall of 2008. That’s when it went vertical as the credit and stock markets “blew up” as Fannie Mae, Freddie Mac, Lehman Brothers, AIG, and other companies either went broke or required massive bailouts.

We saw an initial jump in this spread in late-2015, and it has done nothing but rise since then. It’s getting closer and closer to taking out the late-2011/early-2012 peak, and that bears very close watching. That’s especially true when you consider that other “something is wrong” indicators — like the value of the Japanese yen against the U.S. dollar — are climbing in lock step with these credit risk spreads.

Now I should point out that some on Wall Street are offering up a counter-argument. They’re pointing to new money market fund regulations as the driver of this move. Essentially, the regulations are causing some investment funds to buy less short-term corporate debt and more short-term government paper [BUT,] if that were the case, then

why would the move be so long-lasting and persistent?

why would there be a corresponding sharp move higher in the Japanese yen?

why are they coming at the same time as multi-billionaires and noted market experts are preparing for major market turmoil and

why would the moves “fit” so well with other indicators of rising credit stress, and my thesis of deflating “Everything Bubbles” ?

The fact is I also recall vividly the same kind of excuse-making and happy talk coming from Wall Street back in 2007-2008 when spreads like these began to widen. They said stock investors should ignore them but, if they did, they got crushed in the ensuing market chaos.

I’m not going to sit here and tell you I have all the answers — no one does. What I am saying is that these indicators have flagged looming trouble in the past — and they’re getting more and more disturbing in the present- so be on alert!

Disclosure: The above article has been edited ([ ]) and abridged (…) by the editorial team at munKNEE.com(Your Key to Making Money!) to provide a fast and easy read.

“Follow the munKNEE” on Facebook, on Twitter or via ourFREE bi-weekly Market Intelligence Report newsletter (see sample here , sign up in top right hand corner)

DISCLOSURE: It is our intent that all posts on this site be in accordance with the requirements, restrictions and terms of the Copyright Law of the United States and all other copyright treaties to which the United States is party and more specifically of the Digital Millennium Copyright Act - Blogger . As such, all posts on this website have been screened at Library of Congress Catalog as to their eligibility for posting. Should any post be deemed to be inadvertently in contravention of these Acts' terms please advise with substantiation of such apparent contravention (i.e. registration number) and the article in question will be immediately deleted from the site. Also, visit U.S. Code 17-107 Limitations on Exclusive Rights - Fair Use

FAIR USE NOTICE: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of financial, economic and investment issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

COPYRIGHT & DISCLAIMER: Lorimer Wilson is not a registered advisor and does not give investment advice per se. The articles to be found on the site are expressions of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Please consult with a qualified investment advisor who is licensed by appropriate regulatory agencies in your legal jurisdiction before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments. The information on this site was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that while Wilson may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website they do not intend to disclose the extent of any current holdings or future transactions with respect to any particular security and, as such, you should consider this before investing in any security based upon statements and information contained in any report, post, comment or recommendation you read on the site.